EU Solvency II Split, HP Probe, CFTC-Pensions: Compliance

Nov. 23 (Bloomberg) -- The European Union’s 12-year push to
introduce a common set of rules for the region’s insurance
industry is close to being sidelined as some of the biggest
member states prepare to introduce the regulations piecemeal.

Lobbying by German, British and French insurers over the
impact of the rules on long-term savings products has already
delayed the introduction of Solvency II beyond its original
start date of this year. The regulations, designed to make firms
across the region allocate the same capital reserves against the
risks they take, may not come into force before 2016, according
to executives as they reported third-quarter earnings.

European insurers met in Frankfurt Nov. 21 as regulators in
Germany and the Netherlands continue to weigh whether to
introduce parts of the rules themselves, jeopardizing European
attempts to create a level playing field. Policy makers are also
questioning Solvency II’s use of insurers’ own risk models, a
method used by banks that helped trigger the financial crisis.

European policy makers intended Solvency II to be for
insurers what the Basel Committee on Banking Supervision’s
capital rules are for banks: a common set of rules across the
EU. They will replace regulations developed in the 1970s that
had been superseded by a patchwork of national laws.

Gabriel Bernardino, chairman of the European Insurance and
Occupational Pensions Authority, urged European political
institutions to implement Solvency II.

Solvency II is made up of three key parts, or pillars:
capital requirements for individual companies, a regulatory
assessment of a particular firm’s risk, as well as the
regulator’s broader supervision of the marketplace.

EU lawmakers rescheduled a plenary vote needed to agree on
capital requirements to March 11 from Nov. 20. German, British
and French insurers have criticized the proposals, saying they
will make it costlier to sell savings products with guaranteed
long-term returns.

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Compliance Policy

CFTC Eases Swap Pay-to-Play Rules With Government Pension Plans

Wall Street banks have been freed from Dodd-Frank Act
limits on political contributions intended to limit fraud in
swaps with government pensions.

The Commodity Futures Trading Commission, the main U.S.
derivatives regulator, said in a letter Nov. 20 that it would
not enforce so-called pay-to-play restrictions on banks selling
swaps to the pensions. The restrictions apply to dealers that
have made political contributions to municipal officials in the
two years before a trade.

The CFTC said its decision was intended to harmonize limits
on political contributions from the Securities and Exchange
Commission and Municipal Securities Rulemaking Board. The CFTC
said in the letter that it acted after industry participants
said they would need to “expend significant resources to update
their current policies and procedures to ensure compliance.”

The Dodd-Frank business conduct standards were completed in
January and were intended to protect less-sophisticated
customers in swap trades with banks. Lawmakers in the Dodd-Frank
Act called for regulators to crack down on abuses in the sales
of derivatives to states, cities and school districts after
municipalities lost billions of dollars on interest-rate swaps
during the 2008 credit crisis.

The CFTC also said the two-year waiting period restriction
won’t apply to contributions made before the end of the year.
Banks won’t need to register their swap-dealing units until Dec.
31 at the earliest.

Separately, the CFTC will hold an open meeting in
Washington on Nov. 29 to consider the clearing requirement
determination, according to a statement on the agency’s website.
The proposed regulation would require that certain classes of
credit default swaps and interest rate swaps be cleared by a
derivatives clearing organization registered with the agency,
according to an Aug. 7 notice in the Federal Register.

Compliance Action

TMX Sees Dodd-Frank Pushing Debt to Exchanges, Kloet Says

TMX Group Ltd., owner of Canada’s equity and derivatives
exchanges, will expand its offerings of fixed-income products as
regulations drive trading to public markets, Chief Executive
Officer Thomas Kloet said.

The new products are likely to be helped by the Dodd-Frank
law in the U.S. and other regulations designed to reduce risk
and increase trading transparency after the 2008 global
financial crisis, Kloet said in an interview at Bloomberg’s
Toronto office. The regulations create “enormous potential”
for exchanges and clearing house operators, the 54-year-old CEO
said.

Kloet described the move as a “fundamental sea change.”
said.

The parent of the Toronto Stock Exchange, taken over by
Canadian banks and pension funds in September, is integrating
businesses gained from the C$3.73 billion ($3.74 billion) deal.
The merger brought Canada’s main equity exchanges and clearing
services under one roof, adding stock exchange competitor Alpha
Group and the Canadian Depository for Securities Ltd. clearing
house.

TMX aims to attract more customers and accelerate fixed-income electronic trading with the new products.

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FBI Said to Be Looking Into HP’s Claims Over Autonomy Accounting

The FBI, responding to an inquiry by the U.S. Securities
and Exchange Commission, is looking into Hewlett-Packard Co.’s
allegations of accounting improprieties at its Autonomy Corp.
unit, a person familiar with the matter said.

Hewlett-Packard brought its claims about the U.K software
company it bought last year to the SEC, which asked the Federal
Bureau of Investigation for assistance, said the person, who
asked not to be identified because the matter wasn’t public.
Whenever a company reports a matter that could be criminal in
nature, it will be examined and it wasn’t known whether any
action will result from it, the person said.

Hewlett-Packard Nov. 20 accused Autonomy’s former managers
of a broad range of financial falsehoods resulting in an $8.8
billion writedown.

More than $5 billion of the charge relates to accounting
missteps, including improperly categorized hardware, Hewlett-Packard said. The rest is linked to Hewlett-Packard’s share
value and projections that the deal won’t meet expectations,
said the company, which also forecast fiscal first-quarter
profit that missed analysts’ estimates.

EU Calls on Nations to Apply Financial Supervision Rules

The European Commission urged six countries to implement
financial supervision rules granting power to three new
regulatory agencies including the European Banking Authority.

France, Greece, Belgium, Luxembourg, Poland and Portugal
were given two months to implement new rules due to be in force
at the end of last year.

SAC Insider Probe Rides a Finra Referral Into Cohen’s Backyard

The biggest insider case ever, an alleged $276 million
fraud that has led prosecutors to the inner-circle of SAC
Capital Advisors LP’s Steven Cohen, stemmed in part from a
referral from the Financial Industry Regulatory Authority, Wall
Street’s self-regulator.

The referral came in 2008 from the New York Stock Exchange
Division of Market Regulation, which later became part of Finra,
according to three people familiar with the matter. Finra touted
the case, against ex-SAC portfolio manager Mathew Martoma, under
its website headline, “Actions Resulting from Referrals to
Federal and State Authorities.”

The question for the government now is: where do they go
from here? Court papers cite a “hedge fund owner” in
conversation with Martoma before multimillion-dollar trades were
made. But the government must show that a defendant in any
insider trading case knew that the trades he was making were
based on secret, material information.

Internal SAC e-mails could help the government build more
cases in its investigation, several former prosecutors said. A
senior trader who isn’t named in court documents said in an e-mail to Martoma as he began selling shares that “no one knows
except you me and [the Hedge Fund Owner],” according to the
complaint filed in Manhattan federal court. Cohen isn’t named in
court papers or charged with a crime.

Martoma, an ex-portfolio manager for SAC’s CR Intrinsic
Investors, was arrested Nov. 20 in what the U.S. said was the
most lucrative insider scheme ever -- one that took place in the
arena of health-care stocks.

Referrals from Finra are often pursued by investigators
from the Securities and Exchange Commission and prosecutors from
the Justice Department.

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Indonesia to Develop Corporate Bond Electronic-Trading Platform

Indonesia’s Financial Services Authority plans to develop
an electronic-trading platform and clearing system for corporate
bonds by the end of 2014, Nurhaida, executive commissioner at
the authority, told reporters in Jakarta.

The authority will also develop the derivatives market next
year to help corporate bond investors hedge, according to
Nurhaida.

Courts

Ex-SAC Manager Treated as Pupil by Physician Accused of Tipping

Sid Gilman, a University of Michigan neurologist, was
portrayed by U.S. authorities as a $1,000-an-hour consultant who
leaked confidential drug trial data that helped hedge fund SAC
Capital Advisors LP illegally avoid losses or make profit of
$276 million.

Gilman, 80, was chairman of a safety-monitoring committee
that oversaw a clinical trial by Wyeth LLC and Elan Corp. into
whether the drug bapineuzumab, or bapi, was safe for patients
with mild-to-moderate Alzheimer’s disease. Gilman also
moonlighted for a New York-based expert network, providing
advice at a fee to former SAC portfolio manager Mathew Martoma,
according to the Securities and Exchange Commission and Justice
Department.

Gilman treated Martoma, 38, as a “friend and pupil” as he
leaked him secret data for 18 months, authorities said. Gilman
told Martoma on July 17, 2008, that bapi wasn’t helping patients
as expected, according to the SEC. Prosecutors Nov. 20 charged
Martoma with insider trading and the SEC sued him, saying
Gilman’s tips let Stamford, Connecticut-based SAC and its CR
Intrinsic Investors unit sell more than $960 million in Elan and
Wyeth securities before a July 29, 2008, announcement of the
drug-trial results. The SEC also sued Gilman.

Gilman wasn’t charged with a crime or mentioned by name in
the Federal Bureau of Investigation complaint against Martoma
unsealed Nov. 20 in federal court in New York. Gilman was named
in a non-prosecution agreement made public Nov. 20 by
prosecutors. He didn’t return calls to his home and office in
Ann Arbor, Michigan.

U.S. Attorney Preet Bharara said Nov. 20 at a news
conference in Manhattan that Gilman is prepared to testify in
connection with a non-prosecution agreement. He declined to say
why Gilman wasn’t charged.

“He is cooperating with the SEC and the U.S. Attorney’s
Office,” his lawyer, Marc Mukasey, said.

Martoma’s lawyer, Charles Stillman, has said he is
confident his client will be exonerated.

Kara Gavin, a spokeswoman for the University of Michigan
Health System, didn’t immediately return a call seeking comment
on Gilman. Sheryll Marshall, an administrative assistant in the
university’s neurology department, said Gilman is well-respected
and often participated in medical research.

The criminal case is U.S. v. Martoma, 12-mag-2985; and the
civil case is SEC v. CR Intrinsic Investors LLC, 12-8466, U.S.
District Court, Southern District of New York (Manhattan).

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UBS Said to Face $72 Million Fine for Missing Adoboli’s Trading

UBS AG, Switzerland’s largest bank, faces a fine of about
45 million pounds ($71.7 million) for failing to detect billions
in unauthorized trades by Kweku Adoboli, according to a person
familiar with the situation.

The bank could get a maximum penalty of as much as 50
million pounds from the U.K.’s Financial Services Authority,
said the person, who asked not to be identified because the fine
isn’t yet public. The final sanction is more likely to be closer
to 45 million pounds and hasn’t yet been negotiated, said the
person. A fine of that amount would be the U.K.’s second-highest
ever.

Adoboli, a former trader in UBS’s London office, was
sentenced to seven years in jail on Nov. 20 for fraud in
relation to the $2.3 billion loss, the largest from unauthorized
trading in British history. A UBS investment-bank executive
testified during Adoboli’s trial that losses from his trades
could have reached $12 billion. While UBS warned investment-bank
employees to report signs of illicit trading after Kerviel’s
loss, Adoboli said he could only reach the bank’s goals by
ignoring such warnings.

Swiss regulator Finma is doing a joint report with the FSA.
The agency’s investigation “is still ongoing and we will
comment once it is concluded,” said Tobias Lux, a spokesman for
the Swiss regulator.

Richard Morton, a spokesman for UBS in London, and Joseph
Eyre, an FSA spokesman, both declined to comment.

They testified at the U.K. Parliamentary Commission on
Banking Standards in London.

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Bundesbank’s Dombret Urges U.S. Not to Delay Basel Banking Rules

Bundesbank board member Andreas Dombret said U.S. policy
makers shouldn’t delay the implementation of global banking
rules, known as Basel III.

“There is no alternative to implementing Basel III on a
global scale,” Dombret said Nov. 21 in a speech in Frankfurt.
“In particular, I call on my colleagues in the U.S. not to
unexpectedly question the whole framework in the 11th hour --
after taking part in its negotiation during the entire
process.”

Boosting reserves as required by Basel III would help
prevent a repeat of taxpayer-funded rescues, while “separating
banking functions will not prevent future banking crises,”
Dombret said.